Chapter 1

Managerial Accounting and Cost

Concepts
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All

1-2

Work of Management
Planning
Planning

Directing
Directing and
and
Motivating
Motivating

Controlling
Controlling

1-3

Planning
Identify
Identify
alternatives.
alternatives.
Select
Select alternative
alternative that
that does
does
the
the best
best job
job of
of furthering
furthering
organizations
organizations objectives.
objectives.
Develop
Develop budgets
budgets to
to guide
guide
progress
progress toward
toward the
the
selected
selected alternative.
alternative.

1-4

Directing and Motivating

Directing and motivating involves managing dayto-day activities to keep the organization running
smoothly.

Employee work assignments.

Routine problem solving.
Conflict resolution.
Effective communications.

1-5

Controlling
The
The control
control function
function ensures
ensures
that
that plans
plans are
are being
being followed.
followed.
Feedback
Feedback in
in the
the form
form of
of performance
performance reports
reports
that
that compare
compare actual
actual results
results with
with the
the budget
budget
are
are an
an essential
essential part
part of
of the
the control
control function.
function.

1-6

Planning and Control Cycle

Formulating
Formulatinglonglongand
andshort-term
short-termplans
plans
(Planning)
(Planning)
Comparing
Comparingactual
actual
to
toplanned
planned
performance
performance
(Controlling)
(Controlling)

Decision
Making

Measuring
Measuring
performance
performance
(Controlling)
(Controlling)

Begin

Implementing
Implementing
plans
plans(Directing
(Directing
and
andMotivating)
Motivating)

1-7

Learning Objective 1
Identify the major differences
and similarities between
financial and managerial
accounting.

1-8

Comparison of Financial and Managerial

Accounting

1-9

Learning Objective 2
Identify and give examples of
each of the three basic
manufacturing cost
categories.

1-10

Manufacturing Costs
Direct
Direct
Materials
Materials

Direct
Direct
Labor
Labor

The Product

Manufacturing
Manufacturing
Overhead
Overhead

1-11

Direct Materials
Raw materials that become an integral part of the
product and that can be conveniently traced
directly to it.

Example:
Example: A
A radio
radio installed
installed in
in an
an automobile
automobile

1-12

Direct Labor
Those labor costs that can be easily
traced to individual units of product.

Example:
Example: Wages
Wages paid
paid to
to automobile
automobile assembly
assembly workers
workers

1-13

Manufacturing Overhead
Manufacturing costs cannot be traced directly to
specific units produced.
Examples:
Examples: Indirect
Indirect materials
materials and
and indirect
indirect labor
labor

Materials used to support

the production process.
Examples: Lubricants and
cleaning supplies used in the
automobile assembly plant.

Wages paid to employees

who are not directly
involved in production
work.
Examples: Maintenance
workers, janitors and
security guards.

1-14

Classifications of
Nonmanufacturing Costs
Selling Costs

Administrative
Costs

Costs necessary to get

the order and deliver
the product.

All executive,
organizational, and
clerical costs.

1-15

Learning Objective 3
Distinguish between
product costs and period
costs and give examples
of each.

1-16

Product Costs Versus Period Costs

Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Cost of
Goods Sold

Inventory

Period costs are not

included in product
costs. They are
expensed on the
income statement.
Expense

Sale

Balance
Sheet

Income
Statement

Income
Statement

1-17

Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company? (There may be
more than one correct answer.)
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

1-18

Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company? (There may be
more than one correct answer.)
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

1-19

Prime Cost and Conversion Cost

Manufacturing costs are often
classified as follows:
Direct
Direct
Material
Material

Direct
Direct
Labor
Labor

Prime
Cost

Manufacturing
Manufacturing
Overhead
Overhead

Conversion
Cost

1-20

Comparing Merchandising and

Manufacturing Activities
Merchandisers . . .
Purchase finished
goods from suppliers
for resale to
customers.

MegaLoMart

Manufacturers . . .
Purchases raw
materials from
suppliers.
Produce and sell
finished goods to
customers.

1-21

Balance Sheet
Merchandiser
Current Assets

Cash
Receivables
Prepaid Expenses
Merchandise Inventory

Manufacturer
Current Assets
Cash
Receivables
Prepaid Expenses
Inventories:
1. Raw Materials
2. Work in Process
3. Finished Goods

1-22

Balance Sheet
Merchandiser
Current Assets

Cash
Receivables
Prepaid Expenses
Merchandise
Inventory
Partially complete
products some
material, labor, or
overhead has been
added.

Manufacturer
Current Assets
Cash
Receivables
Materials waiting to
Prepaid
be processed.
Expenses
Inventories:
1. Raw Materials
2. Work in Process
3. Finished Goods

Completed products
awaiting sale.

1-23

Learning Objective 4
Prepare an income
statement including
calculation of the cost of
goods sold.

1-24

The Income Statement

Cost of goods sold for manufacturers differs only
slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold:
Beg. merchandise
inventory
+ Purchases
Goods available
for sale
- Ending
merchandise
inventory
= Cost of goods
sold

$ 14,200
234,150
$ 248,350

(12,100)
$ 236,250

1-25

Inventory Flows
Beginning
Beginning
balance
balance

Additions
Additions
to
to inventory
inventory

Ending
Ending
balance
balance

Withdrawals
Withdrawals
from
from
inventory
inventory

1-26

Quick Check
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
A. $1,000.
B. $ 800.
C. $1,200.
D. $ 200.

1-27

Quick Check
If your inventory balance at the beginning of
the month was $1,000, you bought $100
during the month, and sold $300 during the
month, what would be the balance at the end
of the month?
$1,000 + $100 = $1,100
A. $1,000.
$1,100 - $300 = $800
B. $ 800.
C. $1,200.
D. $ 200.

1-28

Learning Objective 5

Prepare a schedule of cost

of goods manufactured.

1-29

Schedule of Cost of Goods

Manufactured
Calculates the cost of raw
materials, direct labor and
manufacturing overhead used
in production.

Calculates the manufacturing

costs associated with goods
that were finished during the
period.

1-30

Schedule of Cost of Goods

Manufactured
Raw Materials

+
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

Manufacturing
Work
As
items
are
removed
from
AsCosts
items are removed
from
In Process

raw
raw materials
materials inventory
inventory and
and
placed
placed into
into the
the production
production
process,
process, they
they are
are called
called direct
direct
materials.
materials.

1-31

Schedule of Cost of Goods

Manufactured
Raw Materials

+
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

Manufacturing
Costs

Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

Work
Conversion
Conversion
In Process
costs
costsare
arecosts
costs
incurred
incurredto
to
convert
convert the
the
direct
directmaterials
materials
into
into aafinished
finished
product.
product.

As
Asitems
itemsare
areremoved
removedfrom
fromraw
raw
materials
materialsinventory
inventoryand
andplaced
placedinto
into
the
theproduction
production process,
process, they
theyare
are
called
calleddirect
direct materials.
materials.

1-32

Schedule of Cost of Goods

Manufactured
Raw Materials

+
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

Manufacturing
Costs

Work
In Process

Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
Ending work in
All
manufacturing
incurred
All manufacturing costs
costs
incurred
process
inventory
during
added
to
=are
Cost
of goods
during the
theperiod
period are
added
tothe
the
manufactured.
beginning balance of
work in

beginning balance of work in

process.
process.

1-33

Schedule of Cost of Goods

Manufactured
Raw Materials

Manufacturing
Costs

Beginning raw
Direct materials
materials inventory
+ Direct labor
+ Raw materials
+ Mfg. overhead
purchased
= Total manufacturing
= Raw materials
costs
available for use
in production
Ending raw materials
inventory
Costs
associated
with
Costs
associated
with the
thegoods
goodsthat
that
= Raw materials
used
are
completed
arein
completed
duringthe
the period
period are
are
production during

transferred
transferredto
tofinished
finished goods
goods
inventory.
inventory.

+
=

Work
In Process

Beginning work in
process inventory
Total manufacturing
costs
Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured.

1-34

Cost of Goods Sold

1-35

Manufacturing Cost Flows

Costs

Balance Sheet
Inventories

Material Purchases

Raw Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Selling and
Administrative

Finished
Goods

Period Costs

Income
Statement
Expenses

Cost of
Goods
Sold
Selling and
Administrative

1-36

Quick Check
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A.
$276,000
B.
$272,000
C.
$280,000
D.
$ 2,000

1-37

Quick Check
Beginning raw materials inventory was
$32,000. During the month, $276,000 of raw
material was purchased. A count at the end of
the month revealed that $28,000 of raw
material was still present. What is the cost of
direct material used?
A.
$276,000
B.
$272,000
C.
$280,000
D.
$ 2,000

1-38

Quick Check
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A.
$555,000
B.
$835,000
C.
$655,000
D.
Cannot be determined.

1-39

Quick Check
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and
factory overhead was $180,000. What were
total manufacturing costs incurred for the
month?
A.
$555,000
B.
$835,000
C.
$655,000
D.
Cannot be determined.

1-40

Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A.
$1,160,000
B.
$ 910,000
C.
$ 760,000
D.
Cannot be determined.

1-41

Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A.
$1,160,000
B.
$ 910,000
C.
$ 760,000
D.
Cannot be determined.

1-42

Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

1-43

Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for
the month was $760,000. The ending finished
goods inventory was $150,000. What was the
cost of goods sold for the month?
A. $ 20,000.
$130,000 + $760,000 = $890,000
B. $740,000.
$890,000 - $150,000 = $740,000
C. $780,000.
D. $760,000.

1-44

Learning Objective 6

Understand the
differences between
variable costs and fixed
costs.

1-45

Cost Classifications for Predicting

Cost Behavior
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of
business
business activity.
activity.

Total
Total variable
variable costs
costs change
change
when
when activity
activity changes.
changes.
Total
Total fixed
fixed costs
costs remain
remain
unchanged
unchanged when
when activity
activity
changes.
changes.

1-46

Variable Cost

Total Texting Bill

Your total texting bill is based on how

many texts you send.

Number of Texts Sent

1-47

Variable Cost Per Unit

Cost Per Text Sent

The cost per text sent is constant at

5 cents per text.

Number of Texts Sent

1-48

Fixed Cost

Monthly Cell Phone

Contract Fee

Your monthly contract fee for your cell phone is fixed for
the number of monthly minutes in your contract. The
monthly contract fee does not change based on the
number of calls you make.

Number of Minutes Used

Within Monthly Plan

1-49

Fixed Cost Per Unit

Monthly Cell Phone

Contract Fee

Within the monthly contract allotment, the average fixed cost

per cell phone call made decreases as more calls are
made.

Number of Minutes Used

Within Monthly Plan

1-50

Cost Classifications for Predicting

Cost Behavior
Behavior of Cost (within the relevant range)
Cost

In Total

Per Unit

Variable

Total variable cost changes

as activity level changes.

Variable cost per unit remains

the same over wide ranges
of activity.

Fixed

Total fixed cost remains

the same even when the
activity level changes.

Average fixed cost per unit goes

down as activity level goes up.

1-51

Quick Check
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

1-52

Quick Check
Which of the following costs would be variable
with respect to the number of cones sold at a
Baskins & Robbins shop? (There may be
more than one correct answer.)
A. The cost of lighting the store.
B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.

1-53

Learning Objective 7

Understand the
differences between
direct and indirect costs.

1-54

Assigning Costs to Cost Objects

Direct costs

Indirect costs

Costs that can be

easily and conveniently
traced to a unit of
product or other cost
object.

Costs that cannot be

easily and conveniently
traced to a unit of
product or other cost
object.

Examples: Direct
material and direct labor

Example: Manufacturing
overhead

1-55

Learning Objective 8
Understand cost
classifications used in making
decisions: differential costs,
opportunity costs, and sunk
costs.

1-56

Cost Classifications for Decision

Making
Every decision involves a choice
between at least two alternatives.
Only those costs and
benefits that differ
between alternatives
are relevant to the
decision. All other
costs and benefits can
and should be ignored.

1-57

Differential Costs and Revenues

Costs and revenues that differ
among alternatives.
Example: You have a job paying $1,500 per month in
your hometown. You have a job offer in a
neighboring city that pays $2,000 per month. The
commuting cost to the city is $300 per month.
Differential revenue is:
$2,000 $1,500 = $500

Differential cost is:

$300

Net Differential Benefit is:

$200

1-58

Opportunity Costs
The potential benefit that is given up
when one alternative is selected
over another.
Example: If you were
not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.

1-59

Sunk Costs
Cannot be changed by any decision. They
are not differential costs and should be
ignored when making decisions.
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is
sunk because whether you drive it, park it, trade
it, or sell it, you cannot change the $10,000 cost.

1-60

Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.

1-61

Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the cost of the train ticket relevant in this
decision? In other words, should the cost of the
train ticket affect the decision of whether you
drive or take the train to Portland?
A. Yes, the cost of the train ticket is relevant.
B. No, the cost of the train ticket is not
relevant.

1-62

Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant
in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.

1-63

Quick Check
Suppose you are trying to decide whether to
drive or take the train to Portland to attend a
concert. You have ample cash to do either, but
you dont want to waste money needlessly. Is
the annual cost of licensing your car relevant
in this decision?
A. Yes, the licensing cost is relevant.
B. No, the licensing cost is not relevant.

1-64

Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.

1-65

Quick Check
Suppose that your car could be sold now for
$5,000. Is this a sunk cost?
A. Yes, it is a sunk cost.
B. No, it is not a sunk cost.

1-66

Summary of the Types of Cost

Classifications
Financial
Reporting

Predicting
Cost
Behavior

Assigning
Costs to Cost
Objects

Decision
Making

1-67

End of Chapter 1